'In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article.'

'The reasons for the opposition of the 'industrial leaders' to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. We shall examine each of these three categories of objections to the government expansion policy in detail.'

...
'One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment. The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government. The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

'The fact that armaments are the backbone of the policy of fascist full employment has a profound influence upon that policy's economic character. Large-scale armaments are inseparable from the expansion of the armed forces and the preparation of plans for a war of conquest. They also induce competitive rearmament of other countries. This causes the main aim of spending to shift gradually from full employment to securing the maximum effect of rearmament. As a result, employment becomes 'over-full'. Not only is unemployment abolished, but an acute scarcity of labour prevails. Bottlenecks arise in every sphere, and these must be dealt with by the creation of a number of controls. Such an economy has many features of a planned economy, and is sometimes compared, rather ignorantly, with socialism. However, this type of planning is bound to appear whenever an economy sets itself a certain high target of production in a particular sphere, when it becomes a target economy of which the armament economy is a special case. An armament economy involves in particular the curtailment of consumption as compared with that which it could have been under full employment.

'The fascist system starts from the overcoming of unemployment, develops into an armament economy of scarcity, and ends inevitably in war.'

....
'In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in 'playing with' (public) investment or 'wasting money' on subsidizing consumption.

'It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here. (i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked. (ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

'In addition to this fundamental weakness of combating unemployment by stimulating private investment, there is a practical difficulty. The reaction of the entrepreneurs to the measures described is uncertain. If the downswing is sharp, they may take a very pessimistic view of the future, and the reduction of the rate of interest or income tax may then for a long time have little or no effect upon investment, and thus upon the level of output and employment.

....
'Even those who advocate stimulating private investment to counteract the slump frequently do not rely on it exclusively, but envisage that it should be associated with public investment. It looks at present as if business leaders and their experts (at least some of them) would tend to accept as a pis aller public investment financed by borrowing as a means of alleviating slumps. They seem, however, still to be consistently opposed to creating employment by subsidizing consumption and to maintaining full employment.

'This state of affairs is perhaps symptomatic of the future economic regime of capitalist democracies. In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment. But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom, strong opposition by business leaders is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would 'get out of hand' and the 'captains of industry' would be anxious to 'teach them a lesson. Moreover, the price increase in the upswing is to the disadvantage of small and big rentiers, and makes them 'boom-tired.'

'In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business -- as a rule influential in government departments -- would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own.

'This pattern of a political business cycle is not entirely conjectural; something very similar happened in the USA in 1937-8. The breakdown of the boom in the second half of 1937 was actually due to the drastic reduction of the budget deficit. On the other hand, in the acute slump that followed the government promptly reverted to a spending policy.

'The regime of the political business cycle would be an artificial restoration of the position as it existed in nineteenth-century capitalism. Full employment would be reached only at the top of the boom, but slumps would be relatively mild and short-lived.'

The analytical elements of the above argument is pretty easy to understand if you refer to Keynes and draw on a piece of paper the schedule of the marginal efficiency of capital and the market rate of interest. Kalecki and Keynes have the same vision on the macroeconomic dynamism.

Only is it Kalecki is rather pessimistic and Keyens fairly optimistic when it comes to political economy, and I support Kalecki in this regard because I have been witnessing America and the world economy and have for years been reading Ryan's argument.

One can manipulate fancy words and percentages to say or show almost anything wanted. Many will believe what ever is written. Most will not understand, nor will they really try to understand. Might be wasted effort anyway. The real bottom line is this, the amount of real money is not infinite. Spending way beyond income will ultimately catch up. Economic conditions over the last few years demonstrate that. Still, we can dream on a bit longer!

“These open-mouth operations seem, for now, to have halted the second-quarter swoon, in America at any rate.”

OMG! Central bankers are now so powerful that they can speak the economy they want into existence. Maybe they just have really bad breath? It’s so sad that this passes for economics.

“From late March, however, backsliding began.”

So the bond vigilantes are sinners? If RA wasn’t a “market monetarist” he would just admit that the policy failed.

“Expectations found a bottom, which shows up clearly in the S&P 500 and 2-year breakevens.”

The volume has been pretty thin in the recent rally, suggesting that a few people are confident. The stock market goes up and down in the short run based on speculation. Short run movements tell us nothing about the real economy.

“and there is always the possibility that panic will return”

You think there is no reason to panic, just because the central bank talks a good game?

“. There are short term fluctuations, but both have on average kept within a narrow, Fed-maintained band centred on a trend line with a Fed-approved slope.”

That’s an excellent example of spurious correlation. How do you know the economy hasn’t recovered in spite of Fed actions? Other theories of business cycles assert that the actions by the Fed has prolonged the crisis and made the recovery slower than it would have been had the Fed done nothing.

In fact, if you take all of the business cycles since 1800, and compare the recoveries in which the Fed tried to “save” us with the ones in which there was no Fed or the Fed did nothing (such as the 81-82 recessions), an honest person would have trouble giving the Fed credit for anything but prolonging crises.

Why are you complaining about this?
This is the Fed's doing with the "Twist."

Now the Fed can, will, and should step in to slow this process at some point.

Why?
Because Wall Street and other assets have been rising, baking in QE III?
The Fed being held hostage by Wall Street is just as bad as being held hostage by the political cycle.

Temporarily higher inflation would answer a lot of the monetary policy concerns people now voice.

Who are these "people?"
Not the retirees, who are getting 0.1% on their savings while inflation is just under 2%

Not the average worker, who's wage increase is less than the inflation rate - the ones that still have a job.

Not the owner's of businesses, who have to raise prices and then figure out if profits are rising AFTER inflation. (A 3% nominal growth in profits can get wiped by your inflation.)

Simon Johnson - former IMF Chief Economist - in his book "13 Bankers" says there are 3 things that must be done in a finnacial meltdown. (p.174)
1) End the panic.
2) Stop the economic collapse.
3) Groundwork for a sustainable recovery.

I submit that the Fed is respnsible for 1 and 2.
Congress and the President are responsible for 3.

As long as the groundwork - including reforms of the banking system - isn't done, we will be stuck in the mud.

Stuck in the mud, with R.A. wanting the Fed to print more money, expand the balance sheet, and not discussing how the Fed will wind that down.

You are describing the 'paradox of credibility'.
The fed has spent 50 years convincing the world that it will never tolerate inflation much above 2%. It turns out it is just as difficult to repudiate this hard won credibility as it was to build it in the first place. That is why Krugman's suggestion that the Fed behave irrationally for a while won't work. Just a bit irrational and the markets won't believe it, exactly as you point out. A lot irrational and the markets will panic.
The only policy that would really work would be massive money financed consumer debt reduction, lowering the household debt to GDP ratio from its still absurd level of 110% (but down from 130% in 2008) to its historic average of 70-80%. Good luck with that politically.
In the meantime, nominal deleveraging will proceed at around 5-7% per year and we will just have to wait another 5 years or so for things to return to 'normal'. But the new normal will not include the illusory growth of around 1% per year of GDP that came from massive debt accumulation from 1980 to 2008. (Household plus government debt went from 130% of GDP in 1975 to over 250% today).

Maybe. The assumption that there's an important microeconomic effect from inflation expectations seems a little stretchy to me. And it's tough to say which direction it goes in. The market seems to rally on good economic news and fall on bad. That's pretty different from the Greenspan put and argues against the idea that markets are looking primarily to the Fed for investment advice.

I don't think a little inflation would do it. It would have to be quite large inflation, like 25% or more. Businesses are very conservative with their investments. People who haven't been in business don't understand how easily frightened capital is. Investing at the wrong time can take 100% of your money, as many home builders have discovered. That's a lot scarier than 5% or 10% inflation.